The RBA reaction - AUD bulls get some welcome relief as the RBA decide not to act
As we guided in our RBA preview here, the moves by the RBA has surprised the market, with the consensus calling for them to confirm its adopted flexible mindset and inject what is really just psychological support to the economy. I say ‘psychological’ because delaying the planned tapering of its QE program will do very little to support Aussie economics – remember QE does not create inflation directly, it merely takes quality (bonds) assets out of the system and pushes investors out of the risk curve.
So, on one hand the RBA knows QE has limited effect on economics, so why hold off? One can also see that they are looking through this period of forced economic contraction and seeing a recovery not just in Q4 2021, but an acceleration into 2022 - with expectations 2022 GDP grows “by a little over 4%”. This is a big ‘if’ of course and if lockdowns persist then naturally we’ll need more of a response from both fiscal and monetary policy, where the RBA will have no choice but to be seen to be acting.
We had anticipated the AUDUSD would push into 0.7400/10 on this outcome and this has worked well, with the high on the day printing 0.7408. Let's see how London and US traders act on this news, and we may see further covering of shorts in the crosses, with GBPAUD and AUDCAD reversing some of the recent AUD bear move.
The recent CFTC report showed asset managers holding a punchy -52k contract short position in AUD futures – likely the result of hedging flows more than anything. I am sure today’s actions from the RBA may see some looking at their exposures here. We also see dealers and hedge funds (leveraged accounts) long of AUDs, so they’d be welcoming this move. Although, dealers (investment banks) make money from managing flow and not prop trading the market as hedge funds do. Clearly, hedge funds would be hoping for more from the AUD move.
The concern longs should have is what happens if equity vol ramps up? I'm not saying we see the VIX firmly above 25%, although I would welcome it. However, if that's to play out and equity rolled over and mega-cap tech didn’t support on the drawdown, then the USD will rally hard. High beta growth currencies, like the AUD, will find sellers easily enough. So really, if you take a more medium-term view and think the S&P 500 can push into 4500, then the AUDUSD may have room to run into 0.7600.
My own view is that I would be looking for rallies into 0.7500 to enter shorts. In fact, with price now having mean reverted to the 20-day MA, it will be interesting to see if traders lean into this level in the near term. Ready to trade the opportunity?